Alesco takes the greatest hit

August has been a tough month for small industrials, with those companies particularly exposed to the weak domestic consumer or the strong Australian dollar being the worst casualties of reporting season.

But the ASX Small Industrials Index decline of 4.25 per cent is slightly better than its larger ASX 200 counterpart index, which is down 4.69 per cent. Fairview Equity Partners portfolio manager Leigh Cronin says that is because investors believe growth potential is lacking in larger stocks.

“A lot of [smaller] stocks have their own specific dynamics – they’ve got niche markets or they’re growing through store expansion, whereas the large caps are much more reliant on what the economy’s providing them. We’re in the sort of environment where you need more than the broader economic environment is going to give you."

The best performers for August in the small industrials all have tight links with the mining sector, including 4WD accessories maker ARB Corporation, engineering company Sedgman and contractor Macmahon Holdings.

Building materials company
Alesco Corporation
has been the biggest faller as the month draws to a close, down 40.2 per cent, followed by pay-day lender
Cash Converters
and
APN News & Media
.

Alesco Corporation (ALS)

Shares in Alesco Corporation have tumbled 26.5 per cent since it issued a profit downgrade last week for the first half of its 2012 financial year.

Despite recently reporting a 9 per cent rise in earnings before interest and taxation to $36.5 million for its 2011 financial year, which runs to May, Alesco warns of a sharp decline in sales over the past few months. It plans to reduce its workforce by about 50 positions in a bid to cut costs as a result.

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“Trading conditions in the Australian and New Zealand building products markets have deteriorated at a faster rate than anticipated," management said. “This deterioration has been driven by a sharp fall in consumer and business confidence and an increase in household savings."

Citigroup analyst Ross Barrows downgraded the stock from “buy" to “hold" after the announcement, on the belief that declining consumer sentiment, the weak housing market and high Australian dollar would depress growth for the building materials sector in the medium term.

The broker’s 12-month target price for the stock was slashed by 40 per cent to $2 and earnings-per-share expectations for the 2012-2014 financial years reduced by 35 per cent to 38 per cent.

Cash Converters (CCV)

Pay-day lender and pawn shop franchiser Cash Converters’ fortunes have taken a significant turn for the worse this year.

The company had been regarded as a solid investment in an environment of reduced consumer discretionary spending, with its low-cost offering of second-hand goods attractive to value buyers. But a regulatory threat to the pay-day lending component of its business has sent shares down 35.06 per cent this month. The federal government proposes a cap on short-term unsecured loans, so loans of less than $2000 could be charged no more than a 10 per cent upfront fee plus a monthly interest rate of 2 per cent.

With fees of as much as 400 per cent at present, there are concerns the regulation could put pay-day lending out of business, if passed.

The shares have been in a trading halt since Friday pending an announcement on the company’s strategic alliance with United States loan provider Ezcorp. The alliance had been intended to diversify Cash Converters’ financial services offering and facilitate expansion into new markets.

APN News & Media (APN)

Newspaper, magazine, radio and outdoor media company APN has been a casualty of reporting season, with shares falling 24 per cent this month since it posted a 46 per cent fall in net profit after tax before exceptional items for the first half of the 2011 financial year.

The $20.6 million fall in earnings before interest and tax exceeded earlier guidance by APN of $15 million to $20 million, and was driven by write-downs in APN’s newspaper division. Earnings from Australian and NZ newspaper and printing divisions fell 39 per cent and 36 per cent respectively, offset by an 80 per cent jump in earnings from the outdoor advertising division.

Deutsche Bank analyst Andrew Anagnostellis, who has a “hold" rating on the stock, thinks the acquisitions are a move in the right direction but won’t help APN’s short term position. “Given the difficult market conditions, until the [digital] platform is stabilised and earnings growth resumes in publishing we remain cautious," Anagnostellis wrote in a note to clients.